Draghi Says Governments Must Stick to Decisive Measures

Mario Draghi, president of the European Central Bank (ECB). Photographer: Hannelore Foerster/Bloomberg

March 27 (Bloomberg) -- European Central Bank President
Mario Draghi said euro-region governments should continue to
take “decisive measures” after the central bank’s liquidity
provisions helped restore investor confidence.

While the ECB’s injection of more than 1 trillion euros
($1.3 trillion) into the banking system has calmed markets, “no
single institution can carry the burden of addressing a set of
challenges that are simultaneously economic, financial and
fiscal,” Draghi said in Berlin yesterday. “The current
stabilization should not make us pause in our responses.”

Finance ministers from the 17 nations will meet in
Copenhagen on March 30 and Chancellor Angela Merkel gave her
first indication yesterday that she is prepared to allow an
increase in the debt-crisis firewall, saying that Germany could
let the temporary and permanent rescue funds run in parallel.
Merkel cited “fragility” in Spain and Portugal as she revealed
Germany’s position on addressing the future backstop.

Draghi said member states have “taken important steps to
strengthen euro-area and global firewalls” as “the entry into
force of the European Stability Mechanism has been advanced and
the paying-in of capital will be accelerated to reach full
lending capacity sooner than originally planned.”

‘Constantly Alert’

Policy makers are discussing how to add to the funds, for
example by allowing the European Financial Stability Facility
and ESM to work concurrently to make more money available.
Maintaining the used sums from the temporary fund while allowing
the ESM to operate at capacity would bring a total crisis
backstop to 692 billion euros.

While the ECB’s two three-year loans to banks have helped
sooth Europe’s turmoil, it has raised concerns that they could
fuel inflation. For now, “market indicators of inflation
expectations overall show no signs of inflation above our
medium-term objective,” Draghi said, adding that officials are
“constantly alert to threats to” inflation.

The ECB “has a range of tools at its disposal to absorb
excess liquidity if that is deemed necessary in the future,” he
said. “Available tools include increases in reserve
requirements and the conduct of liquidity absorbing operations
including not only short-term but also longer-term deposits.”